Bitcoin slides amid rollercoaster ride

The price of digital currency Bitcoin has fallen sharply in a period of wild trading since it passed the $11,000 mark a day ago. Bitcoin is now around $9,600, down about 16% from the record $11,434 (£8,500) it hit on Wednesday.The digital currency is used by some people to pay for things online, but most users see it as an investment. On Wednesday, a Bank of England deputy governor warned “investors should do their homework” on Bitcoin.

What is Bitcoin?

There are two key traits of Bitcoin: it is digital and it is seen as an alternative currency. Unlike the notes or coins in your pocket, it largely exists online. Secondly, Bitcoin is not printed by governments or traditional banks. A small but growing number of businesses, including Expedia and Microsoft, accept bitcoins – which work like virtual tokens. However, the vast majority of users now buy and sell them as a financial investment. At its peak, Bitcoin had increased by 1,000% from the $1,000 value at which it started the year. Bitcoin is “prone to wild swings”, partly because it is not well regulated and because there are fewer traders, said Dr Garrick Hileman of the Judge Business School at University of Cambridge. The trading over the past day “was a rollercoaster like nothing I’ve ever seen,” said Neil Wilson, a financial analyst at ETX capital in London. He said part of the volatility was due to small investors “with no market experience” buying and selling the coin. There is no way to discern what fair value is – it’s so incredibly speculative and it is so new and not properly understood.”

‘Not a currency’

Critics have said Bitcoin is going through a bubble similar to the dotcom boom, whereas others say it is rising in price because it is crossing into the financial mainstream. On Thursday, Randal Quarles, the Federal Reserve’s vice chair for supervision, warned that digital currencies like Bitcoin could pose “more serious financial stability issues” if adopted widely. Financial regulators have taken a range of views on the status of digital currencies and their risks. Sir Jon Cunliffe, the Bank’s deputy governor for financial stability, said Bitcoin was “not of a size that would be a threat to financial stability” or a risk to the UK economy. But he also told the BBC on Wednesday: “People need to be clear this is not an official currency. No central bank stands behind it, no government stands behind it.”

Bitcoin is “closer to a commodity” than a currency, with people choosing to invest and trade in it, Sir Jon said. Bitcoins are created through a complex process known as mining, and then monitored by a network of computers across the world. A steady stream of about 3,600 new bitcoins are created a day – with about 16.5 million now in circulation from a maximum limit of 21 million. Bitcoin and other digital currencies are coming under closer scrutiny due to the rapid price rise. The UK’s Financial Conduct Authority warned investors in September they could lose all their money if they buy digital currencies issued by firms, known as “initial coin offerings”.

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